Global finance starts getting climate message
Beyond the shores of the Potomac, where the US commitment to tackling climate change remains in question, there is gathering evidence that the political momentum towards action has reached a tipping point.
One promising sign to have emerged from this year’s One Planet summit near Paris came in the form of a pledge by 225 financial institutions to begin holding the world’s worst carbonemitting companies to account. Investors from eight of the world’s top asset managers, pension funds, insurers and top sovereign wealth funds, as well as 20 globally systemic banks, backed the initiative.
This will see them join the Climate Action 100+ to pressure companies to cut greenhouse gas emissions and improve disclosure and oversight of climate-related threats.
Climate change provides three types of risk to companies.
In the short term, there will be consequences if governments — with or without Washington — get serious about enforcing their commitments made under the
Paris treaty to limit temperature rises to 2°C. Should they do so, there will be costs to companies who fail to fall into line.
The far more serious longerterm risk is that governments fail to act or do too little too late. Measuring the potential impact on bottom lines of cataclysmic events that would hypothetically follow, together with the social and economic consequences, will not be easy. But the threat of these becoming more frequent is no doubt real.
Global greenhouse gas emissions are forecast to rise 2% to a record high this year, driven by economic growth in China, according to the Global Carbon Project. This brings to an end a three-year period with almost no growth in emissions.
The alarming effect on the environment is undeniable.
This week, a report by the US government’s National Oceanic and Atmospheric Administration found that permafrost in the Arctic is thawing faster than ever, and sea water is warming and ice melting at the swiftest pace in 1 500 years. The implications for insurance companies in the near and medium term are obvious.
A third risk is that advances in green technology happen faster than imagined. While this provides huge opportunities for those entrepreneurs who keep apace, it could be disastrous for those that do not. Fossil fuel companies would be left with stranded assets, their commercial viability jeopardised.
There is no binding legal framework to enforce disclosure on these issues. But the fact that so many of the world’s top financial institutions are prepared to push for more transparency is encouraging.
That ExxonMobil has pledged to fall in line is also a welcome mark of change. Until the past decade, the world’s largest listed oil and gas company actively sought to suppress concerns about the damage that carbon emissions are causing.
That it now promises to go public shows it is still possible to mobilise big US companies to address climate change even when the US president is so explicitly hostile to the agenda.
Calculating the likely impact will be inexact and the information provided will initially at least be of varying value. But for certain categories of companies, all three main risks will be material to the bottom line. So it is not just activists campaigning for divestment from the worst emitters that have an interest in greater disclosure about the implications of climate change. Ordinary shareholders need to know, too.
Making it more difficult for companies to ignore the cost of their carbon footprint could play a role in forcing them to reduce it. This is an exercise in transparency and peer pressure that will have long-term consequences. — © The Financial Times